DAX

This is the Dax, that is Frankfurt, Germany index. It is a total return index and consequently is not directly comparable to others that do not include the dividend. These two are the big picture. Below is the small picture;

This is time consuming stuff and I do not have the right charting equipment, but nevertheless this may add some confidence that we are, or were, at a top of sorts. Furthermore, I am not at all confident that there actually was a triangle so using the channel I start it in 2009 rather than 2012. By the way , this index from the 2000 peak to the recent peak is up roughly 77% by my calculation. Take away a 2% dividend over 18 years would leave a capital appreciation of just 41% or a little more than 2% per annum. A lot less than the Dow etc.

It now looks like we completed an initial first wave down – either a wave 1 or A – followed by an irregular a-b-c correction back up. It should be complete soon. Then wave 3 or c should start. At this time I would very much favour a wave 3, etc,etc. Ultimately there would be little to stop this before the entire uptrend from 2009 is reversed. Time will tell.

We had this interpretation in our previous blogs, either a series of 4-5s or, more likely, a diagonal triangle 5th wave. This is a long chart and therefore does not lend itself for precise predictions but our take on this is that we are about to peak and that a dramatic drop is straight ahead as that is a “diagonal” which invariable retrace their entire advance. In this case that would amount to roughly a 2/3 loss from whatever peak lies ahead.

The Dow is going vertical, and if anything, confirms the possibility of a major top.

The Dax is, ofcourse, a total return index so contrary to, for instance the Dow, the value of the Dax should increase by the dividends and the price appreciation of the stocks. It should therefore record relatively higher values than most other indexes.

Recently I was reading somebody else’s take on the Dax. The argument was that we are in a contracting diagonal triangle, shown in red in the semi-log chart on the right. This may well be correct but it differs from what I thought was going on some two years ago, which is a triangle with a thrust to slightly under 12000. Initially that worked out quite well as the Dax did turn at about that time and dropped some 5000 points or >40%. But then the Dax turned around again and recouped all the losses and then some. One explanation could be that the “thrust” having started with a 1-2, 1-2, only completed a wave 3 and needed a 4 and 5 before completing.

In any event looking at it today, I still prefer the triangle interpretation but that has become somewhat irrelevant as regardless of whether or not the diagonal or the triangle are operative, the Dax is very close to peaking. The triangles mouth measurement, applied from the low point of the e-wave (about 8000 points) suggests a peak at around 13000 to 13250. Under both scenarios, as always, the ultimate target is the level of the 4th wave of previous degree or roughly 2000. When is always a little more difficult but this index should turn soon as in days or weeks but not months.

By the way, had you bought right at the top of the tech bubble in 2000, your total return to date is still less than 4% per annum. That includes the dividends of about 2%!

We happened upon this particular chart on Bloomberg that we thought is instructive in these modern times in which QE, in one form or another, is the rage. Currency swings have been around for a long time and were often larger in magnitude than they are now. For instance in the mid-eighties US$/DeutschMark moved from 3.50 to 1.50 and back again in a little over a year. Sterling had similar swings earlier and our own Canadian dollar has moved from 1.04 to .61 to 1.10 against the US$, albeit over an appreciable longer period of time. Yet the respective stock markets did not appear to have the large gyrations they do today. Perhaps this time is different as most capital mobility constraints have long gone and we now have a huge pool of “homeless” (hot if you prefer) money sloshing around.

The recent rise in the Swiss Franc caused by the Central Bank abandoning the currency peg, led, initially at least, to a corresponding drop in their stock market, see below;

Because one event occurs immediately after the other we will use the post hoc ergo ….. fallacy to assume there is not just correlation but causation, even if in this particular example it seems to dissipate rather rapidly to contradict that same assumption. Debasing the currency is, by the way, an excellent way of making the rich richer and the locals poorer.

Back to the DAX. If you are wondering what the leading stocks were to push the Dax up, they are Volkswagen, BMW and Daimler (Mercedes), all three big exporters and all three from an industry that was down and out not too long ago. Time to buy Peabody Energy (BTU) perhaps???